Buy to rent investors

Many property professionals have in recent years recommended that buy-to-rent investors in the residential market tend to fare best when they stick to the lower middle and lower price brackets.

Michael Bauer, General Manager of the property management company, IHFM, one of those who gave this advice on several occasions, has pointed out recently that what he has advocated has been supported by the latest statistics from the quarterly Rental Payment Monitor published by TPN.

The Monitor, said Bauer, breaks up tenants into four categories: those who do not pay at all, those who pay late, those who pay on time but do not necessarily always hand over the full amount and those who pay in full and on time.

In the last quarter of 2010, said Bauer, 84% of Western Cape tenants were listed by The Monitor as being in good standing with their landlords, i.e. had paid on time or close to the agreed time. This figure is, said Bauer, a big improvement on the Gauteng figure.

“What is particularly significant,” said Bauer, “is that the best payment performance was in the R3,000 to R7,000 bracket. Here in the Western Cape 71% of tenants paid on time and 13% paid the full amount but not quite on the due date.

“In the sub-R3,000 bracket the performance of tenants was also satisfactory: 60% paid on time and 17% paid late, with 7% not paying at all. However, in the R12,000 plus bracket only 50% paid on time and 27% paid late. As The Monitor comments, landlords in this category have to have a strong cash flow if they are to cope with a situation in which one in four tenants is now paying late.”

The cash flow implications out of non-payment of monthly rental of anything from R12,000 to R35,000, said Bauer, can be serious.

“This,” he said, “is another reason why at IHFM we recommend investors look at the lower priced properties. Here financial risk is lower because of the lower defaults on rentals. Furthermore, over two or three months of a typical default this is not as crippling as in the higher priced properties where the sums lost can be so high.”

Bauer said that he agrees with The Monitor when they predict that demand in the lower and affordable brackets (i.e. those paying less than R7,000 per month) will increase from now on because a lack of new developments has caused supply shortages especially in the metropolitan areas of South Africa. This is likely in time to lead to significant rises in rentals due to the time-lag in supply and an upturn in the number of buy-to-rent investors (who at the moment comprise only some 7% of the total property buying market).

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